The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Lander Sports Development Co., Ltd. (SZSE:000558) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Lander Sports Development
What Is Lander Sports Development's Net Debt?
As you can see below, Lander Sports Development had CN¥442.6m of debt at September 2023, down from CN¥500.8m a year prior. However, because it has a cash reserve of CN¥88.2m, its net debt is less, at about CN¥354.4m.
A Look At Lander Sports Development's Liabilities
According to the last reported balance sheet, Lander Sports Development had liabilities of CN¥289.1m due within 12 months, and liabilities of CN¥357.0m due beyond 12 months. Offsetting this, it had CN¥88.2m in cash and CN¥69.5m in receivables that were due within 12 months. So its liabilities total CN¥488.5m more than the combination of its cash and short-term receivables.
Given Lander Sports Development has a market capitalization of CN¥4.07b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Lander Sports Development's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Lander Sports Development wasn't profitable at an EBIT level, but managed to grow its revenue by 97%, to CN¥181m. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
While we can certainly appreciate Lander Sports Development's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥9.5m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥39m into a profit. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Lander Sports Development that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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